Forecast tables moderately adjusted

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• The U.S. and Iran were engaged in renewed military skirmishes near the Strait of Hormuz. Nevertheless, both sides have generally been adhering to the agreed-upon ceasefire and continuing their negotiations on a final agreement.
• ECB President Lagarde stated at the Sintra Conference that monetary policy has gained more room to maneuver as economic resilience in the euro area has increased. However, neither Lagarde nor her Fed colleague Kevin Warsh have provided any specific guidance regarding their respective monetary policies.
• Overall, the U.S. labor market data for June confirmed the picture of solid employment growth. However, both the ADP report and the official labor market report showed a slowdown in job growth compared to the previous month.
• The ISM Manufacturing Index showed a slight clouding in sentiment for June. From a business perspective, inflationary pressure is easing somewhat, but remains significantly elevated.
• In the eurozone, inflation fell below the 3% mark in June for the first time since March. The core rate also retreated slightly more than consensus expectations.
• The U.S. Supreme Court has, for the time being, rejected President Trump's efforts to remove Federal Reserve Governor Lisa Cook from office. Trump, however, refuses to back down.

What could drive the market next week?

• Investors are still keeping a close eye on developments in the Middle East. However, the threshold for significant impacts on the financial markets appears to have risen noticeably.
• Both the ECB and the Fed will publish the minutes of their most recent interest rate meetings.
• In the U.S., according to our forecast, the ISM index for the services sector is set to show a moderate improvement in sentiment for the second consecutive month. Otherwise, the macroeconomic calendar will be relatively light on both sides of the Atlantic.
• The primary market for U.S. Treasury securities will have to absorb the next wave of long-term bond issuance next week. Meanwhile, activity in the primary market for euro-denominated government bonds is likely to decline compared with last week. We expect gross supply of just under EUR 20 bn., following EUR 26 bn. the previous week. The highlight will be the placement of a new 10-year German Bund. Given low reflows from maturities, net cash flows are set to remain negative.

Elmar Völker, Senior Fixed Income Analyst